It’s tough to get a word in edgewise as U.S. producers beat their chest over their shale oil and gas finds and impending energy independence, but one analyst has managed to deflate some of the hype.

Bob Brackett, an analyst at New York-based Bernstein Research, says oil wells in Montana, part of the giant Bakken shale basin, are rapidly deteriorating.

“Something is rotten in the State of Montana and it smells like moldy shale,” Mr. Brackett wrote in a note to clients. “Montana production of oil is down 38% from its 2006 peak of more than 100,000 barrels per day.”

The state, which shares the Bakken with North Dakota and Saskatchewan, produces between 1% and 2% of U.S. output and is home to two of the largest oil fields in the country. More important, Montana is home to Elm Coulee field, the poster child of Bakken potential and was expected to recover more than 200 million barrels.

But Montana’s oil boom cycle appears to have flamed out pretty quickly. As a result, Montana’s economy, which outpaced the U.S. economy during the mid-2000s, is expected to post just 0.9% growth this year, according to JPMorgan Chase & Co. estimates. Unemployment stands at 6.9%, nearly double that of neighbouring North Dakota, where the oil boom has shifted.

The fear is, will Montana’s rapid boom-to-bust cycle be replicated elsewhere in other U.S. shale basins?

While Mr. Brackett concedes that Montana production is roughly 10% of North Dakota’s overall output, the decline “contradicts the industry canard that shale oil production growth is seemingly limitless,” he said.

Crucially, Montana output is declining not because of oil prices or fewer drilling permits, but as resource plays have limited or finite drilling locations, the best locations get drilled early, the less economic ones later, and once they are drilled, operators move on, the analyst argued.

Occidental Petroleum Corp., which bet early on a domestic production surge in the basin, is already pulling back.

“We got a lot better places to put money right now than the Bakken — that’s why I am slowing it down,” Occidental chief executive Stephen Chazen said on a first-quarter conference call with analysts — a position he reiterated at the end of the current quarter.

Montana shale production has fallen from a peak of 400 oil-equivalent barrels per day per well during 2003-05 to about 250 per well today, even though companies had poured in massive resources and employed the latest technologies and techniques during this time to extract more from each well.

Another worrying indicator for oil shale developers is how quickly a high-oil producing well is downgraded to a ‘stripper’ well — industry jargon for a less-productive well. Bernstein research shows that it takes a Bakken well an average of six years to become a stripper well, which suggest the issue is not just restricted to Montana wells.

“There are 200 modern Bakken horizontal wells that are now strippers. In six years there will be 4,000 Bakken horizontal wells that are strippers,” said Mr. Brackett, citing the example of the 800-well Richmond County that began operation in 2000, peaked around 2006 and has been steadily declining since. “One quarter of the expected volume of a Bakken well will be delivered during its time as a stripper and, in that time, the price of oil must exceed the operating costs of these old wells.”

Costs are going to be crucial as oil prices recede. Oil field services already moan of high costs of raw materials such as guar gum, apart from rising labour costs. While drilling costs are coming down, a rapid rise in production could see oil prices go the way of natural gas prices, which recently touched a decade low.

While West Texas Intermediate prices stand at US$91 per barrel, they had slipped to US$77.91 as recently as June, uncomfortably close to the US$55-US$70-per-barrel breakeven cost for a barrel of U.S. shale oil.

Meanwhile, the International Energy Agency says Bakken’s enormous growth rate in 2012 will abate somewhat in 2013 as “geography and bottlenecks will crimp producer netbacks.”

But for now, the U.S. oil industry remains a feel-good story for a country looking for positive news in times of an alarming debt crisis and political inaction. The U.S. Energy Information Administration (EIA) latest estimates show the country’s proven oil and gas reserves rose by the highest amount since it began publishing proved reserves estimates in 1977. Crude oil reserves have shot up 13%, with all the key areas — Texas, Gulf of Mexico, Alaska, California and North Dakota — posting impressive growth. Meanwhile, four of the five largest natural-gas states (Texas, Louisiana, Oklahoma and Colorado) registered net gains, leading to an overall 13% rise in gas reserves.

The EIA credits the use of horizontal drilling and hydraulic fracturing in shale and other tight formations for driving estimates upward.

While there is no denying the long-term prospects for the United States’ oil-and-gas industry, energy independence may remain a distant dream.

“Even under a high potential [domestic production] scenario, the United States will still need to import oil for the foreseeable future,” says the National Petroleum Council, an advisory body, which should be music to the ears of Canadian oil sands producers watching the U.S. shale revolution with dismay.

But they shouldn’t get overexuberant, as the worrying Montana shale data may not mean an imminent collapse in shale production.

“While U.S. oil production will grow over the next few years with the Bakken and Eagle Ford becoming million-barrels-a-day fields, the world will not find itself awash in oil (shale or otherwise),” Mr. Brackett said.

If Friday's gains are anything to go by, investors are champing at the bit

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